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Mar 14, 2010

Red Back Mining: The Transformation Continues

Personally, I'm not a big fan of investing in Africa in general. But following Red Back Mining (RBIFF.PK) leads me to believe that the future for gold miners in West Africa is much brighter than one would think.

I first wrote an article for Seeking Alpha back in November detailing Red Back's incredible year with regards to mine development, drilling results, reserve and resource expansion,etc. But just five months later, Red Back's story is becoming one of a world class miner in the making.

The following is an excerpt from the November article. Even though the price has run up 40% since my first article on the company, the advancements made since last November warrant much more than the move from $14.2 to $19.95.

Due to very successful exploration and expansion efforts, Red Back has three mines, all having yet to reach peak production, let alone reach a consensus on where that level might be. Just a year ago, Red Back’s peak production estimates remained just above 500k/oz per annum. World class mines have become harder and harder to come by as the largest gold deposits have already been discovered, making this story of organic growth somewhat of a standout.

Though increased production guidance hasn’t been announced yet, it is most certainly on the horizon. I think Red Back will seek becoming a 1m oz producer through one or two small to moderately sized acquisitions. Below is a brief rundown of the evolution of the operating assets over the last year.

March 2009 – Increased proven reserves 39% following a 119% increase over the previous 18 months.

March 2009 – Steady ramp up at Akwaaba Deep

April 7 2009 – Initial reserve/resource update at Paboase South, with potential for a second underground operation at Chirano

April 21 2009 – Announced a new zone discovery at Tasiast

June 27 – Discovery of a high grade extension to the Paboase deposit at Chirano

October 26 – 33% increase in reserves at Tasiast (generally considered world class deposit at this point) and 22% increase in M&I resources.

November 16 – 20% Increase in M&I resources at Tasiast

Although the consensus currently has Red Back producing 495k in 2010, 540k in 2011, 560 in 2012 and 580k in 2013, these estimates don’t account for the smooth ramp up at Akwaaba, the high production levels already seen in Q3 from Chirano, nor the almost guaranteed increase in production guidance at Tasiast. I’m expecting to see between 510-520k in 2010, 580k in 2011, 620k in 2012 and 650-700k in 2013/2014. Even these estimates may prove to be prudent at Chirano continues to surpass consensus estimates, Tasiast has been repeatedly increasing reserves which all should make for a very interesting 2011 and beyond."

I had a feeling Red Back would update production guidance within two years, but they have already increased their forecast by 22% in 2012 , 26% in 2013 & 21.4% in 2014, when peak production is forecast to be met. Total production is now expected to be 740k in 2012, 820k in 2013 and 850k in 2014. Red Back's largest producing mine, Tasiast, has been transformed into a a world class mine in just 15 months. Tasiast still has enormous upside potential as exploration continues on the same property. Tasiast's production will jump nearly 100k oz in 2010 to 240k, 280k in 2011, 460k in 2012 and 520k in 2013. The projected production levels in 2012 and 2013 will likely be raised as it does not include

Production from heap leach mining (pre-feasibility studies have recently commenced).

The large exploration initiative in the Greeschist zone, which if successful will add a significant increase in production due to the higher grade ore.

More upside potential in Chirano, which has high grade intercepts at all open pits. Ramp up at Akwaaba also has potential to increase production due to the several high grade zones with strong grade continuity.

In addition to a large increase in estimated production, Tasiast in particular is adding both resources and proven reserves at a furious pace. Red Back has increased reserves by a whopping 64% from just last August, which now exceeds 5m oz. but the amazing part is that 92% of this is attributable to the increase in mineral resource.

Red Back still has only explored a fraction of the entire Tasiast structure. The best part is that this is being done organically saving them from having to make costly acquisitions to fund further growth. Their operations require fairly small capital needs, allowing them to spend more on exploration on what has become the first highly prospective mine in the Greenstone belt.

With their capital needs fully funded, aggressive exploration efforts, it is very conceivable that Red Back can reach 1m oz within the next five years. They have 150m in cash, no debt and large operating cash flow which will allow them to bring future growth opportunities into production in a short period of time.

Summing it all up, as well as some operational highlights for FY 2009, Red Back achieved the following in 2009:

Net income of $109 million (Earnings per share of $0.48)

31% increase in gold production to 342,085 oz

15% increase in average realized gold price ($996 per oz compared to $866 in 2008)

Cash operating costs of $391 per oz

85% increase in proven and probable reserves to 3.05 million oz at Tasiast ( measured in August 2009) followed by the most recent increase of 64% to over 5m oz.

Discovery of the Greenschist zone at Tasiast

Discovery of the Paboase underground deposit at Chirano

Completion of plant expansions at Chirano and Tasiast

Commencement of commercial underground mining of Akwaaba at Chirano

Commencement of dump leach operations at Tasiast

I continue to think Red Back is far and away the best African miner to own instead of the more popular Randgold Resources (GOLD), which, although having bright prospects going forward, operates in countries which have more geo-political risk, most notably the DRC.